Question

3 Question 3 Suppose the own price elasticity of demand for the products of an industry is (-0.7), and the Rothschild Index is 0.15. What happens to the demand of a representative firm in this industry, if its price increases by 1%?

Answer 1

Answer 3

Formula :

Rothschild index = Elasticity of demand for the industry / Elasticity of demand for the firm

Here it is given that Rothschild index = 0.15 and Elasticity of demand for the industry = -0.7

Hence, using above formula we have :

0.15 = Elasticity of demand for the industry / Elasticity of demand for the firm = -0.7/Elasticity of demand for the firm

=> Elasticity of demand for the firm = -0.7/0.15 = -4.67

Elasticity of demand = % change in Demand / % change in price

As, Elasticity of demand of a firm = -4.67 and price increases by 1% => % change in price = 1%

Thus -4.67 = % change in Demand / 1%

=> % change in D = -4.67%(negative sign means that demand will decrease).

Hence, If price increases by 1% then Demand of a representative firm in the industry will decrease by 4.67%.